Chapter 3
Will Demographic Change Undermine Asia’s Growth Prospects?
Andrew Mason, Sang-Hyop Lee, and Ronald Lee
Demographic change is occurring rapidly throughout Asia, with fundamental
implications for both national and regional economies. Often, population change is
viewed with alarm—that economic prosperity will be undermined because population
growth is too fast or too slow; because populations are too young or too old. On balance,
however, demographic change is likely to provide a positive impetus for economic
growth in Asia during the first half of the 21st century, especially if regional cooperation
continues to improve. Of particular importance are policies that facilitate the flows of
immigrants and capital between countries with young and growing populations and
countries that have old and declining populations. The prosperity of Asia’s aging
countries will depend, as well, on domestic policies that encourage investment in human
capital, flexible labor markets, well-functioning financial markets, and macroeconomic
stability, and that discourage excessive reliance on large-scale transfer programs for the
elderly.
The countries of Asia are experiencing two fundamental changes in their
populations that will influence standards of living and regional economic forces. First,
population growth is slowing, but more rapidly in some countries than in others.
Differential population growth will lead to regional shifts in population, labor force, the
number of consumers, and related economic activity.
Second, populations are experiencing important changes in their age structures.
In all economies, the percentage of children in the population is declining or has already
reached low levels. The share of the working age population is increasing or has
reached very high levels. This change, which has had a very direct and favorable impact
on growth in per capita income, is called the “first demographic dividend.”
The large working share in the population is a transitory phenomenon, however.
Low birth rates and increasing life expectancy are leading to an increase in the older
population. The share of the working age population will decline and, as that happens,
the first demographic dividend will turn negative. Eventually, the share of the population
of working age will be no greater than early in the demographic transition. The key
difference will be populations with many more elderly and many fewer children.
Although children and the elderly are both referred to as dependents, they differ
in a very important way. Children rely almost exclusively on transfers to the fill the large
gap between what they consume and what they earn. The elderly, in contrast, rely on a
combination of transfers and lifecycle saving to fill the gap. Thus, aging—and the
anticipation of aging—will lead to an enormous increase in transfers and/or assets.

Research for this chapter was supported in part by two grants from the National Institutes of Health, NIA
R01-AG025488 and NIA R37-AG025247, and from the MEXT Academic Frontier Project for Private
Universities awarded to Nihon University Population Research Institute. Diana Wongkaren provided
excellent assistance with many of the calculations.
2
Whether countries will rely on transfers or assets to fund the needs of a growing
elderly population will depend on policies, culture, and institutions. Compared with
European and Latin American countries, Asia has relied less on public pay-as-you-go
pension programs. But health care for the elderly is a large and increasing cost that is
often heavily subsidized by the public sector. Moreover, familial transfers to the elderly
may be very important in Asia. Thus, aging in Asia may lead to large implicit debts that
are shared by taxpayers and the adult children of the elderly.
If the needs of a growing elderly population are met through greater reliance on
lifecycle saving, population aging will lead to an increase in assets, with favorable
implications for economic growth. Previous studies and the analysis presented below
show that, through this mechanism, changes in age structure can lead to a second
demographic dividend—higher standards of living that persist long after the favorable
effects of the first dividend have ended.
The economic effects are not confined by national borders. Divergent
demographic trends in the region are likely to generate international capital flows from
economies experiencing the most rapid increase in saving rates to economies in which
the population is aging more slowly (but have rapidly growing labor forces).
The demographic processes described here—known as the demographic
transition—apply generally to almost every country. However, important details of the
transition vary among economies. Some economies in Asia have experienced very rapid
transitions. In the People’s Republic of China (PRC), Japan, the Republic of Korea, and
some members of the Association of Southeast Asian Nations (ASEAN), changes in age
structure are particularly dramatic. Moreover, the timing of the demographic transition
varies across the region. Japan is furthest along, while India and some ASEAN
economies are relatively early in the transition. As a consequence, the impact of age
structure for any particular decade varies considerably from economy to economy.
Moreover, the differences in the transition create the demographic divergence that leads
to differences in factor shares, with implications for trade, foreign investment, and
immigration.
The rest of this chapter addresses these issues in more detail. In keeping with
the approach of this study, the experiences and prospects in (i) ASEAN; (ii) the PRC,
Hong Kong, China; and Taipei,China; (iii) India; (iv) Japan; and (iv) the Republic of
Korea are contrasted. Demographic trends are discussed in section 3.1. The information
presented there is based on the most recent estimates and projections prepared by the
United Nations (UN) Population Division (2007).1
The economic implications of demographic changes are addressed in section 3.2
following the broad outlines discussed in the introduction. The section discusses
research on the relationship between population and economics and present new
analysis of how demographic change will influence key macroeconomic variables in (i)
ASEAN; (ii) the PRC, Hong Kong, China; and Taipei,China; (iii) India; (iv) Japan, and (v)
the Republic of Korea.
1
Demographic estimates for Taipei,China are drawn from DGBAS (various years) and projections from the
Department of Manpower Planning, Taipei,China.
3
The final section discusses the implications of the analysis for policy. First, social
and economic policies that respond to or accommodate the expected changes in
population in the region are discussed. Second, population policy itself is discussed.
3.1.
The demography: two important trends
The demographic transition is a pervasive and important phenomenon in Asia.
Death and birth rates have declined throughout the region, with important implications
for population growth and age structure. Migration has played a less important role in
Asia’s demography, except in a few countries.
Although the focus of this study is from the 1990s financial crisis forward,
demographic changes are slowly evolving, relatively long term, and best understood in
historical context. Hence, the data presented in this section cover 1950–2050, drawing
primarily on estimates and projections of the UN Population Division. Demographic data
for Taipei,China are drawn from a variety of sources available in more detail from the
authors by request.
3.1.1. Demographic transition and population growth
Asian economies, like other economies around the world, are in the midst of the
demographic transition. In the middle of the 20th century, birth rates were high in every
Asian economy but Japan. Death rates had begun to decline in a number of Asian
economies, with two important demographic effects. First, a lower death rate led to more
rapid population growth. Second, a lower death rate led to a population with many more
children because the declines in mortality were concentrated at young ages.
Annual births per woman hovered near historic highs, at over 40 per 1,000
people in 1950–1955, according to United Nations (UN) Population Division (2007)
estimates. Death rates varied from nearly 30 per 1,000 people to 10 per 1,000. The rate
of natural increase—the difference between the birth rate and the death rate—measures
the rate at which the population would grow in the absence of immigration. The rate
varied from around 20 to almost 40. In other words, population growth rates varied from
roughly 2% to 4% per year—rapid rates of population growth (Figure 3.1).
During the following 50 years, death rates declined very substantially. By 2000–
2005, the death rate was near or below 10 per 1,000 in every country. Birth rates also
declined. In some countries, the birth rate declined by more than the death rate, leading
to slower population growth, but population growth rates remained close to 2% per year
or more in many countries during 1975–1980. By 2000–2005, however, birth rates
decline further (Figure 3.1). In Japan, births and deaths were nearly equal during this
period. In other countries, population growth ranged from near 0 to about 2% per year.
To complete the story, the authors rely on projections, about which there is some
uncertainty. The values plotted in Figure 3.1 are based on the UN Population Divisions’
medium scenario, which assumes that countries will continue to experience steady
improvements in their life expectancy. Populations in which fertility rates are currently
very low (e.g., the PRC; Hong Kong, China; Japan; the Republic of Korea; Singapore;
4
and Taipei,China) are assumed to increase, while fertility rates in economies with
relatively high fertility (e.g., India and the Philippines) are assumed to decline further.
Figure 3.1: Birth and death rates for selected Asian Economies, 1950–
1955 to 2045–2050
50
Birth Rate (per 1000)
40
RNI=20
RNI=40
RNI=0
30
20
1950-55
1975-80
2000-05
2025-30
10
2045-50
0
0
10
20
30
40
50
Death Rate (per 1000)
RNI = rate of natural increase
Source: United Nations Population Division (2007).
If this projection proves to be accurate, population growth will vary between plus
or minus 1% per year depending on the country. Death rates will rise moderately in
many countries because of changes in age structure—a larger share of the population
will be concentrated at older, high-risk ages. The change in birth rates will also be
influenced by age structure as the share of the population concentrated at reproductive
ages declines.
The broad outlines of the demographic transition are similar in every country of
Asia, but the speed and the timing of the transition vary across countries. The transition
began first in Japan, then in other East and Southeast Asian economies, and, more
recently in some ASEAN economies and India. The transition has been very rapid in the
PRC; Hong Kong, China; the Republic of Korea; and Taipei,China compared with
economies elsewhere in Asia, other parts of the developing world, or in Western
countries.
Table 3.1 reports population growth rates are reported for (i) ASEAN; (ii) the PRC,
Hong Kong, China; and Taipei,China; and (iii) India, Japan, and the Republic of Korea.
For 2000–2005, Japan’s population growth was almost zero. The PRC and Taipei,China
had population growth rates well below 1% per annum. Among the ASEAN economies,
only Myanmar and Thailand were growing at less than 1% per annum. Two Asian
5
economies had growth rates that would have been well below 1% were it not for
substantial rates of immigration—Hong Kong, China and Singapore. The population
growth rates for 2000–2005 of other ASEAN economies vary from 1.3% in Indonesia to
2.3% in Brunei. India’s growth rate is moderately high at 1.6% per year for 2000–2005.
Table 3.1: Population growth rates, 1950–2050 (percent)
Economy
ASEAN
1950–1955 1975–1980 2000–2005 2025–2010 2045–2050
2.10
2.14
1.39
0.69
0.19
Brunei Darussalam
5.56
3.65
2.29
1.28
0.78
Cambodia
2.15
–1.01
1.76
1.26
0.77
Indonesia
1.67
2.20
1.31
0.61
0.10
Lao PDR
2.73
1.30
1.62
1.08
0.50
Malaysia
2.72
2.32
1.95
0.87
0.41
Myanmar
1.96
2.19
0.89
0.47
0.01
Philippines
2.99
2.70
2.08
1.09
0.50
Singapore
4.90
1.30
1.49
0.38
–0.37
Thailand
2.84
2.08
0.76
0.12
–0.27
Viet Nam
1.87
1.99
1.45
0.75
0.21
1.90
1.49
0.67
0.17
–0.32
China, People's Rep. of
1.87
1.48
0.67
0.17
–0.32
Hong Kong, China
4.64
2.73
1.15
0.54
0.11
Taipei,China
3.63
1.95
0.54
–0.06
–0.89
India
1.73
2.30
1.62
0.79
0.32
Japan
1.43
0.93
0.14
–0.56
–0.78
Korea, Rep. of
2.55
1.55
0.46
–0.25
–0.89
PRC; Hong Kong, China; and Taipei,China
Other
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic, PRC = People’s
Republic of China.
Note: Values for (i) ASEAN; and (ii) PRC, Hong Kong, China; and Taipei,China are for the combined populations not
simple average across the group members.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the Department
of Manpower Planning, Taipei,China.
Differences in the timing of the demographic transition are leading to regional
shifts in the concentration of population. In terms of population, Asia is dominated by two
giants and this will continue to be the case. Over 40% of the population lives in the PRC,
Hong Kong, China; and Taipei,China; and 34% in India. The combined population of the
ASEAN states is 17% of the total. Japan and the Republic of Korea have relatively small
populations compared with their neighbors.
6
Figure 3.2: Regional distribution of population, 2000
[PLEASE DISAGGREGATE CHINA+3 INTO PRC, HONG KONG, CHINA AND TAIPEI,CHINA]
2%
4%
17%
ASEAN
CHINA +
India
Japan
Korea, Rep. of
34%
43%
ASEAN = Association of Southeast Asian Nations.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the
Department of Manpower Planning, Taipei,China.
Because of differences in population growth rates, the populations of ASEAN and
India are increasing relative to those of the PRC, Japan, and the Republic of Korea
(Figures 3.2, 3.3). India’s population is projected to exceed that of the PRC, Hong Kong,
China; and Taipei,China by 2030.
Figure 3.3: Regional distribution of population, 2050
[PLEASE DISAGGREGATE CHINA+3 INTO PRC, HONG KONG, CHINA AND TAIPEI,CHINA]
1%
3%
19%
ASEAN
CHINA +
India
Japan
Korea, Rep. of
41%
36%
ASEAN = Association of Southeast Asian Nations.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the Department
of Manpower Planning, Taipei,China.
7
3.1.2. Population age structure
Population age structure changes in a very predictable way during the
demographic transition. Early in the transition, the percentage of the population who are
children increases as a result of declines in infant and child mortality rates. Later the
child share declines and the percentage of the working age population increases. In the
final stages, the share of the working age population declines while that of the older
group increases.
The rise in the child share of the population occurred in ASEAN, the PRC, and
India between 1950 and 1975. In ASEAN, for example, the proportion of the population
under age 20 increased from 49.0% to 53.0% (Table 3.2). The decline in the population
under age 20 has been extraordinarily rapid in some Asian countries—notably, in the
PRC; Hong Kong, China; Taipei,China; and in the Republic of Korea. In 1975, just over
50% of the Republic of Korea’s population consisted of children under the age of 20. The
projected value for 2025 is 16.8%.
Table 3.2: Percentage of population under age 20, 1950–2050
Economy
ASEAN
1950
1975
2000
2025
2050
49.0
53.0
41.8
30.3
24.1
Brunei Darussalam
46.0
50.5
40.0
29.6
24.7
Cambodia
52.6
52.8
54.3
39.0
29.4
Indonesia
50.0
52.3
40.6
28.9
23.6
Lao PDR
49.5
54.3
54.1
38.7
26.9
Malaysia
50.4
53.2
43.6
31.7
24.5
Myanmar
44.3
51.7
40.4
27.9
23.0
Philippines
53.7
55.4
48.4
37.3
26.6
Singapore
50.0
45.7
28.1
16.4
15.5
Thailand
53.0
53.3
32.1
24.4
21.4
Viet Nam
41.9
53.8
44.1
29.4
23.1
PRC; Hong Kong, China; Taipei,China
43.4
48.8
32.8
23.7
20.5
China, People's Rep. of
43.3
48.9
32.9
23.8
20.5
Hong Kong, China
41.2
42.3
23.7
15.7
15.2
Taipei, China
52.5
47.4
29.7
20.6
18.6
India
47.7
50.6
45.1
33.3
24.4
Japan
45.8
31.5
20.5
15.5
15.3
Korea, Rep. of
51.7
50.3
28.9
16.8
14.2
Other
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic., PRC = People’s Republic
of China.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the Department
of Manpower Planning, Taipei,China.
8
The low level reflects the fact that the Republic of Korea has one of the world’s
lowest total fertility rates. Other economies in which the child share is expected to drop
to or remain at very low levels over the coming decades are the PRC; Hong Kong,
China; Japan; Singapore; and Taipei,China.
The proportion of the population that was of working age, defined here as people
aged 20 to 64, increased between 1975 and 2000 in the PRC; Hong Kong, China; India,
Japan, the Republic of Korea; and Taipei,China; and in every ASEAN economy but
Cambodia and the Lao People’s Democratic Republic. The proportion reached 60% or
more in the PRC; Hong Kong, China; Japan; the Republic of Korea; Singapore;
Taipei,China; and Thailand. These economies are at or near the peak and will not
experience any substantial change in the share of their working age population between
2000 and 2025. Japan is an exception, and will experience a significant decline in the
working age share (Table 3.3).
Table 3.3: Percentage of population age 20–64, 1950–2050
Economy
1950
1975
2000
2025
2050
47.2
43.4
53.3
60.6
58.3
Brunei Darussalam
49.2
46.0
57.0
62.8
60.5
Cambodia
44.7
44.4
42.7
56.0
60.9
Indonesia
46.1
44.4
54.5
62.1
57.8
Lao PDR
48.4
42.7
42.5
56.5
62.5
Malaysia
44.6
43.0
52.5
59.6
59.2
Myanmar
52.3
44.0
54.1
62.9
58.1
Philippines
42.7
41.6
48.0
56.3
60.4
Singapore
47.6
50.1
64.8
60.8
51.7
Thailand
43.8
43.1
61.2
60.7
55.3
Viet Nam
53.9
41.3
50.5
61.9
57.7
52.1
46.8
60.3
62.5
55.7
China, People's Rep. of
52.2
46.7
60.3
62.5
55.8
Hong Kong, China
56.3
52.3
65.4
62.6
52.1
Taipei, China
45.0
49.2
62.1
62.3
55.5
India
49.2
46.0
50.3
58.9
61.1
Japan
49.3
60.6
62.2
55.1
47.0
Korea, Rep. of
45.2
46.1
63.7
63.6
50.6
ASEAN
PRC; Hong Kong, China; and Taipei,China
Other
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic, PRC = People’s
Republic of China.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the Department
of Manpower Planning, Taipei,China.
The largest increases in the working age populations are occurring in ASEAN
and India. Between 2000 and 2025, the working age share will increase 7 percentage
points in ASEAN and almost 9 percentage points in India. Within ASEAN, the gains will
be dramatic in Cambodia (13 points), Lao People’s Democratic Republic (14 points), and
Viet Nam (11 points).
9
Population aging is coming very rapidly to the economies of East Asia. Japan,
with the proportion 65 and older increasing from 17.2% in 2000 to 29.5% in 2025, has
the oldest population in the world. Other East Asian countries are experiencing rapid
aging. The percentage 65 and older will double between 2000 and 2025 in the PRC,
Hong Kong, China; and Taipei,China—from 6.9% to 13.8%—and will more than double
in Thailand—from 6.7% to 14.9%. Even more rapid aging will occur in the Republic of
Korea and Singapore, where 19.6% and 22.8%, respectively, of their populations are
projected to be 65 and older by 2025 (Table 3.4).
Table 3.4: Percentage of population 65 and older, 1950–2050
Economy
1950
1975
2000
2025
3.8
3.6
4.9
9.1
17.7
Brunei Darussalam
4.9
3.5
2.9
7.6
14.8
Cambodia
2.7
2.8
2.9
5.0
9.8
Indonesia
4.0
3.3
4.9
9.0
18.6
Lao PDR
2.2
3.1
3.4
4.7
10.6
Malaysia
5.1
3.7
3.9
8.7
16.3
Myanmar
3.4
4.2
5.5
9.3
18.9
Philippines
3.6
3.1
3.5
6.5
12.9
Singapore
2.4
4.1
7.2
22.8
32.8
Thailand
3.2
3.6
6.7
14.9
23.3
Viet Nam
4.2
4.9
5.5
8.7
19.2
4.4
4.4
6.9
13.8
23.8
China, People's Rep. of
4.5
4.4
6.8
13.7
23.7
Hong Kong, China
2.5
5.4
11.0
21.7
32.6
Taipei, China
2.4
3.4
8.1
17.2
25.9
India
3.1
3.4
4.6
7.7
14.5
Japan
4.9
7.9
17.2
29.5
37.7
Korea, Rep. of
3.0
3.6
7.4
19.6
35.1
ASEAN
PRC; Hong Kong, China; and Taipei,China
2050
Other
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Sources: United Nations Population Division (2007); DGBAS (various years); and projections from the
Department of Manpower Planning, Taipei,China.
Elsewhere, the share of the population 65 and older will not reach 10% until after
2025. By 2050, however, the ASEAN share is projected to reach 17.7% and India’s
share, 14.5%. At first glance, demographic characteristics in 2050 may appear to be
remote to the economic concerns of today. Nothing could be further from the truth,
however. The elderly population of 2050 is the working population of today. The
prospect of old age and retirement will influence current behavior—for example, that
pertaining to saving. Moreover, policies implemented by governments today will
determine the success with which today’s working populations can adequately prepare
for an extended old age.
10
3.1.3. The role of immigration2
Immigration plays a relatively modest role in determining population growth and
age structure, compared with the roles of births and deaths. Immigrant flows are heavily
regulated and limited—mostly by receiving countries. With a few exceptions, Asian
economies have not opened their borders to immigrants and there is little to suggest that
will change soon, regardless of economic or demographic pressures that may emerge in
the coming years.
Asia’s largest economies are net sending economies. Net migration from the
PRC, India, Indonesia, and the Philippines has consistently been negative (outward).
The rate of net migration is quite small in the PRC and India and, thus, has little effect on
the size of their national populations. In 2000–2005, for example, the PRC lost 0.03% its
population yearly due to immigration, and India lost 0.02%. The rate of out-migration
from Indonesia and the Philippines is relatively higher than in most other economies—
0.09% per year in Indonesia and 0.23% in the Philippines. But even in these two
economies, the impact on the growth of the population in any year is modest (Table 3.5).
These four economies contribute relatively large shares to global migration flows
because their populations are so large. For 2000–2005, the annual net numbers of
immigrants were 390,000 from the PRC, 280,000 from India, 200,000 from Indonesia,
and 180,000 from the Philippines. Combined, they contributed just over 1 million
immigrants a year to the global flow. This compares with a total outflow of 2.6 million per
year from the less developed regions to the more developed regions of the world during
the same period.
Most of the immigrants were not moving to other Asian countries. Total net
inflows, including from outside Asia, were approximately 100,000 per year to the net
receiving countries of ASEAN; 60,000 per year for Hong Kong, China; and only 54,000
per year for Japan.
For a few countries in the region, migration is significant relative to their domestic
populations. The Philippines has sustained immigrant outflows at a significant level for
many years. As a consequence, remittances are currently about 13% of the Philippines’
gross domestic product (GDP). Brunei Darussalam; Hong Kong, China; and Singapore
have actively encouraged immigration to their countries. Over 40% of Hong Kong’s and
Singapore’s populations and one third of Brunei’s population are immigrants.
Japan falls at the other end of the immigration spectrum, with its relatively closed
borders. Given the high wages of its workers compared with those of its neighbors and
the declining numbers in the working ages, one might well expect substantial
immigration into Japan. Currently about 2 million immigrants live in Japan—1.6% of its
population. This compares with immigrant shares of 9.5% for the world’s “more
developed regions” and of 12.9% for the United States (US).
2
Estimates in this section are drawn from two sources: UN (2006 and 2007).
11
Table 3.5: Annual net migration rate (net migrants per thousand population)
1950– 1955– 1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000–
Economy
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
18.0
13.6
11.0
17.3
13.6
10.9
2.5
4.7
2.6
2.2
2.0
Cambodia
0.0
0.0
0.0
–0.1
–12.8
–3.6
—
3.4
2.8
1.3
0.2
Indonesia
0.0
0.0
–0.1
–0.1
0.0
–0.1
–0.1
–0.5
–0.8
–0.9
–0.9
Lao PDR
0.0
0.0
0.0
0.0
0.0
–13.2
–2.1
0.0
–1.4
–3.5
–4.2
Malaysia
1.9
1.3
1.0
–1.5
–1.6
1.5
–0.3
1.8
3.0
4.5
1.2
Myanmar
—
—
—
—
—
—
–0.3
–0.7
–0.6
0.0
–0.4
Philippines
—
—
—
–0.7
–1.1
–1.6
–3.0
–2.7
–2.8
–2.5
–2.2
Singapore
15.0
11.6
1.1
0.4
1.3
0.9
11.7
9.7
15.4
19.6
9.6
Thailand
—
—
—
—
0.4
0.9
0.0
0.0
0.6
1.7
0.7
Viet Nam
—
—
—
—
—
–3.2
–0.9
–0.8
–0.7
–0.5
–0.5
China, People’s Rep. of
–0.1
–0.1
–0.2
—
–0.2
–0.1
–0.0
–0.1
–0.2
–0.2
–0.3
Hong Kong, China
17.4
13.0
9.5
–5.0
7.3
15.1
5.1
0.9
10.1
9.3
8.7
—
—
0.1
0.0
–0.5
–0.4
–0.4
–0.3
–0.2
–0.2
–0.2
Japan
0.0
–0.1
0.0
–0.1
–0.1
0.0
0.0
0.3
0.4
0.4
0.4
Korea, Rep. of
5.4
0.0
–0.2
–0.2
–0.8
–1.0
–1.0
–0.9
–0.5
–0.3
–0.3
India
0.0
0.0
0.0
–0.1
–0.1
–0.1
–0.1
–0.1
–0.2
–0.3
–0.2
ASEAN
Brunei Darussalam
PRC; Hong Kong, China;
and Taipei,China
Taipei,China
Other
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Sources: United Nations Population Division (2007); Taiwan-Fuchien Demographic Fact Book (various years).
3.2.
Economic and social implications
Population change has important implications for individual economies, but also
for regional economies and regional integration. First, national and regional populations
are growing at very different rates, with ASEAN and India increasing relative to the PRC;
Hong Kong, China; Japan; the Republic of Korea; and Taipei,China. Inevitably, changes
in the size of populations influence the size of regional economies. More people means
more consumers, more workers, and more savers and investors. The extent to which
larger populations result in greater aggregate consumption, aggregate earners, and
aggregate saving and investment will be influenced by a host of factors beyond the size
of national and regional populations. None the less, population size is an important
consideration.
Second, changes in population age structure that vary across Asia have
important social and economic implications. Current thinking is that the major effects of
population on per capita income and consumption arise because of changes in age
12
structure. Many economies in Asia have experienced an increase in the share of the
working age population with rather direct favorable effects for income per person. This
effect—the first demographic dividend—is a transitory phenomenon because as
populations age the share of the working age population will return to levels near those
that prevailed early in the demographic transition. Population aging will, thus, serve as a
drag on growth in per capita income.
This view may prove to be unduly pessimistic because of the possibility of a
second demographic dividend. Population aging will lead to a substantial increase in the
demand for wealth to fund retirement. This wealth can be accumulated in the form of
capital with implications for productivity, wages, per capita income, and – in open
economies - international capital flows. But if economies rely on intergenerational
transfers to fund retirement, wealth is accumulated in the form of transfer wealth for
current generations and implicit debt for future generations.
National and regional differences in the growth of consumer demand, labor
forces, and aggregate saving and investment will influence international flows of workers,
goods and services, and capital. The classic approach to this issue is that international
flows arise in response to international differences in relative factor endowments
(Deardorff 1987). A key question is whether divergent population trends lead to
divergent factor endowments.
The impact of divergent factor endowments will depend to a great extent on the
institutional context. (To properly address this topic would require separate
consideration.) Divergent capital-labor ratios can lead to immigration, capital flows,
and/or trade, depending on the policy context. As noted in the preceding section,
international labor flows are relatively limited in Asia. In the absence of radical changes
in policy, population aging is more likely to influence international capital flows and trade
than immigration.
3.2.1. The economic lifecycle
The economic lifecycle is fundamental to understanding the relationship between
population age structure and the economy. All populations include age groups with
extended periods of dependency. Children consume more resources than they produce
through their own labor and must rely heavily on intergenerational transfers from their
parents (and grandparents) and from taxpayers. The elderly also consume more than
they produce. They rely on intergenerational familial and public transfers, and on
personal assets to fill the gap between what they consume and what they produce
through their own labor.
Figure 3.4 is an estimate of the economic lifecycle based on analysis of
consumption and labor income data for four developing economies. The figure is a
cross-sectional profile constructed from per capita measures of labor income and
consumption by single year of age. The values are normalized on average labor income
of adults aged 30–49. Labor income includes all returns to labor—earnings, benefits,
and self-employment income—estimated as a proportion of the operating surplus or
mixed income of the household sector. The age profiles are based on nationally
representative household surveys of income and adjusted to match national income
account data.
13
Labor income is a composite. It includes the labor income of both men and
women. It is influenced by labor force participation rates, variation in hours worked, and
variation in wages for employees and productivity for the self-employed. Earnings, which
can be measured with relative accuracy, is a dominant share of labor income in
developed countries, However, self-employment income, which is poorly measured, is a
substantially large share of labor income in low-income countries.
Consumption includes both public and private consumption. Private consumption
of health, education, and other goods and services has been estimated separately from
nationally representative surveys of consumption. Public consumption has also been
estimated separately for education, health, and other publicly provided goods and
services. Private and public consumption have also been adjusted to match National
Income and Product Accounts (NIPA) values.3
Figure 3.4: Economic lifecycle, developing world profile
Consumption and labor income,
per capita
1.2
1.0
Labor income
0.8
Consumption
0.6
0.4
0.2
0.0
0
10
20
30
40
50
60
70
80
90+
Age
Note: Values normalized on per capita labor income of people 30–49.
Source: Lee and Mason (2007).
One must be very careful to avoid interpreting these figures as longitudinal or
cohort profiles rather than as cross-sectional profiles. In a growing economy with these
cross-sectional profiles, labor income will rise more steeply for young cohorts, peak at a
later age, and decline more slowly for the elderly. Consumption will not be flat for a
cohort—rather it will rise with age at a rate roughly equal to the rate of aggregate per
capita consumption growth.
The age at which children become economically independent is surprisingly
advanced. Children under 25 are producing less than they consume. Likewise, old age
dependency occurs at a surprisingly early age. People 60 and older are producing less
from their labor than they consume. The lifecycle surplus is confined to 34 years—from
ages 25 to 59.
3
Detailed information about the methodology is available in Lee, Lee, et al. (2007).
14
The extent of dependency varies across the dependent ages, however. People in
their early 20s are producing almost as much as they consume as, are those in their
early 60s. Young children produce nothing, but they also consume much less than a
teenager or someone over 60.
The subsequent sections will make extensive use of the economic lifecycle to
provide a more refined measure of how changes in population age structure will
influence trends in consumption and labor, and their magnitudes relative to one another.
3.2.2. The first dividend
Recent studies on the macroeconomic effects of population age structure are
based on growth models that explicitly incorporate population age structure. The
simplest form for these models distinguishes two components of per capita income:
Y LY
.[is this correct? See next equation, which has a + on the right side]

N NL
(1)
The exact definitions of the terms vary across studies, but, broadly speaking, Y/N
is per capita income, L/N is the share of the population of working age—also called the
support ratio—and Y/L is income per worker or working age person. Letting gr[.]
represent the growth rate, equation (1) can be readily transformed into growth terms:
Y 
L
Y 
gr    gr    gr  
N 
N 
L
(2)
Equation (2) identifies two channels through which population can influence per
capita income. First, the support ratio varies with changes in the population age structure.
Given the rate of growth in Y/L, a 1 percentage point increase in the support ratio yields
a 1 percentage point increase in per capita income. This effect is referred to as the
accounting effect or the first dividend. Second, changes in population age structure,
other population changes, and nondemographic factors influence productivity growth, i.e.,
the growth of Y/L.
Elaborations of this simple growth model have been used to study population and
economic growth using three approaches. First, aggregate panel data have been used
to estimate growth models, usually adapting equation (2) to a Barro-type growth
framework (Kelley and Schmidt 1995, Bloom and Williamson 1998, Bloom and Canning
2001, Kelley and Schmidt 2001, Kelley and Schmidt 2007 [highlighted citations not in
references]). A second approach relies on growth accounting methods (Mason 2001). A
third method uses simulation modeling (Cutler et al. 1990; Mason 2005; Attanasio, Kitao,
and Violante 2006; Mason and Lee 2006; Mason 2007).
A simple refinement of the growth model incorporates the age variation in the
economic lifecycle into the calculation of the support ratio. In this formulation, L is the
effective labor force calculated using the age profile of labor income to weight population
data. The effective labor force then incorporates age variation in labor force participation,
15
hours worked, and productivity. The denominator N should also incorporate age
variation in consumption to measure the effective number of consumers. Thus, if income
per effective consumer, Y/N, increases by 1%, the per capita age profile of consumption
in Figure 3.4 can increase by 1% holding the consumption ratio (the ratio of consumption
to national income) constant. To be explicit, the effective number of producers, L, and
the effective number of consumers, N, are defined to be:
L(t )    ( x) P( x, t )
x
N (t )   ( x) P( x, t )
(3)
x
where P(x,t) is the population aged x in year t,  ( x) is the age profile of labor
income, and  ( x ) is the age profile of consumption. Both age profiles are held constant
with respect to time.4
Figure 3.5 plots the economic support ratio for five economies from 1950 to 2050.
Japan’s support ratio has peaked and is beginning to decline, but for all others in Asia,
the economic support ratio is rising and thus contributing to more rapid growth in income
per effective consumer. The size of the contribution—the first dividend—is more easily
judged from the growth rate of the support ratio (Figure 3.6).
4
An interesting and important question is how the economic lifecycle changes over time and how that will
influence the analysis presented here.
16
Figure 3.5: Economic support ratio, 1950–2050
1.1
Support ratio
1.0
0.9
0.8
0.7
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
0.6
ASEAN
PRC
India
Japan
Rep. of Korea
Source: Calculated by authors.
Given the emphasis of the broader study on a shorter time frame, the first
dividend is presented for 1990 to 2025. In the early 1990s, the first dividend was turning
negative in Japan, increasingly so as time progressed. By 2025 the decline in the
economic support ratio will be depressing growth in income per effective consumer by
0.5% per year.
The experiences of the PRC and of the Republic of Korea are similar, with the
first dividend marginally larger in the former three in each year. In the early 1990s, the
first dividend added about 1% per year to growth in income per effective consumer. The
impact has declined steadily. It is still positive, but will soon disappear and after 2020 will
depress growth by 0.5% per year. In ASEAN and India, the dividend is positive for the
entire 35 year period. Currently, the increase in the economic support ratio is adding
approximately 0.5% per year to growth in income per effective consumer. During 1990–
2025, the first dividend has raised income per effective consumer in total by 21% in
ASEAN and by 18% in India.
17
Figure 3.6: The first demographic dividend, 1990–2025 (%)
1.5
Percent
1.0
0.5
0.0
-0.5
-1.0
1990
1995
2000
ASEAN
2005
PRC
2010
India
2015
Japan
2020
2025
Korea
Source: Calculated by authors; data from ???.
Unable to edit legend.
Changes in the economic support ratio emphasize the implications of population
age structure for per capita values. The changes in the total number of effective
consumers and producers are also of interest because of their implications for trade,
capital flows, and immigration. The most rapid growth in the effective number of
consumers is in ASEAN and India. For the period 2005–2010, the annual growth rate in
the effective number of consumers is 1.4% in ASEAN and 1.7% in India. The effective
number of consumers is growing much more slowly in the PRC and the Republic of
Korea, and is declining slowly in Japan (Table 3.6).
Table 3.6: Annual growth rates, effective numbers of consumers and producers (%)
Group, Economy
1990
1995
2000
2005
2010
2015
2020
ASEAN
2.0
1.8
1.6
1.4
1.2
1.1
0.9
PRC
1.3
1.1
0.9
0.7
0.6
0.5
0.3
India
2.2
2.0
1.8
1.7
1.5
1.3
1.1
Japan
0.5
0.3
0.1
–0.1
–0.2
–0.3
–0.5
Korea, Rep. of
1.1
0.9
0.7
0.5
0.3
0.1
–0.1
2.8
2.7
2.3
2.1
1.7
1.3
1.0
Effective Consumers
Effective Producers
ASEAN
18
PRC
2.4
1.9
1.4
1.1
0.7
0.3
–0.2
India
2.5
2.4
2.3
2.2
2.0
1.8
1.6
Japan
0.5
0.2
–0.1
–0.4
–0.6
–0.7
–0.8
Korea, Rep. of
2.2
1.6
1.2
0.7
0.2
–0.2
–0.7
ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China.
Source: [ please add the source]
Currently, the effective number of producers is growing more rapidly than the
effective number of consumers except in Japan. The annual growth rate is about 2% per
annum in ASEAN and India; 1.0% in the PRC and 0.7% in the Republic of Korea; and it
is declining by 0.4% in Japan.
The differences in growth rates may seem small but their cumulative effect is not,
because they are persistent. The coming decades will see a significant shift to the West
and to the South. India will supplant the PRC as the largest country in terms of effective
numbers of consumers and producers. ASEAN’s share will grow to approach about 20%
by 2050. Japan and the Republic of Korea will shrink relative to their neighbors. The
Republic of Korea’s share of effective producers will be cut in half by 2050 and Japan’s
by over 60% (Table 3.7).
Tables 3.7: Distribution of effective consumers and producers
Group, Economy
1990
2025
2050
ASEAN
16.4
18.0
19.0
PRC
45.3
39.5
36.0
India
31.7
37.8
41.4
Japan
4.9
3.3
2.6
Korea, Rep. of
1.7
1.3
1.1
100.0
100.0
100.0
ASEAN
15.4
18.1
19.1
PRC
47.2
40.5
34.3
India
29.9
37.0
43.5
Japan
5.7
3.0
2.2
Korea, Rep. of
1.8
1.4
0.9
100.0
100.0
100.0
Effective Consumers
Total
Effective Producers
Total
ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China.
Source: [ please add the source]
3.2.3. The second dividend
The first dividend depends entirely on changes in the size of the effective work
force relative to the population (or the effective number of consumers). Output and
income per working age adult are held constant and, hence, the possible effects of
population growth or changing age structure on the second component in the basic
19
growth identity, equation (2), are set aside. Here the possibility that demographic trends
are influencing income per effective worker is explored.
There are many potentially important channels through which productivity may be
influenced by population. First, the contribution of women to measured output has
increased substantially as they have increased their educational attainment, both
absolutely and relative to men, and as they have increased their labor force participation
(Bauer 2001). Second, the tradeoff between child quality and quantity has been realized
with substantial increases in investment in children’s education (Becker 1991). A simple
causal model in which exogenous fertility decline precipitated changes in education and
female labor force participation is untenable, however. Childbearing, investment in
children, and the economic role of women are responding to a variety of forces, e.g., the
decline in infant and child mortality, the shift in the relative values of brawn and brain,
and the increased returns to investment in education. Despite the importance of these
channels, the relationships between population, capital accumulation, and productivity
are emphasized here.
A fundamental result that follows from the neoclassical growth model is that
slower population growth (or growth in the effective labor force) leads to capital
deepening and an increase in output per worker (Solow 1956). If the workforce is
growing more rapidly, a larger share of current investment must be devoted to providing
capital to new workers (capital widening). Less is available for increasing capital per
worker (capital deepening). The steady state capital output ratio (K/Y) depends only on
the saving rate and the rate of population growth (n) and technological change (  ):
K / Y  s /(n   ) . Any decline in the population growth rate leads to a rise in the capital
output ratio.
This is an important point because the decline in the economic support ratio at
the end of the demographic transition is a direct result of slower growth in the labor force.
The first dividend will be negative, but, given a constant saving rate, output per worker
will rise. Hence, population aging may lead to higher not lower per capita income. Indeed,
this was the conclusion reached by Cutler et al. in their analysis of US aging (Cutler et al.
1990).
Given the objective of this analysis, two assumptions underlying the simple
neoclassical growth model are unattractive: that the saving rate is exogenous and that
the economy is closed.
The lifecycle saving model is widely used to analyze the effects of population and
other factors on saving (Modigliani and Brumberg 1954, Modigliani 1988) and capital
(Tobin 1967). In the classic lifecycle model, individuals save when they are young and
dis-save during their retirement years. Thus, given the age profile of saving, an increase
in the old age population leads to lower aggregate saving. A lower saving rate does not
unambiguously lead to a decline in capital because of the capital deepening effect. If n
and s both decline, K/Y may increase or fall.
The validity of the lifecycle model is widely debated. Factors other than the desire
to provide for old age may motivate saving. Old age support may be provided through
public or through familial support. Models estimated using aggregate data support very
large effects of age structure (Kelley and Schmidt 1996, Higgins and Williamson 1997,
Williamson and Higgins 2001). Models based on survey data suggest more modest
20
influences from age structure (Deaton and Paxson 2000). Simulation models imply that
age structure has an important effect, but one that is smaller than that found in
aggregate empirical work (Lee, Mason, and Miller 2000).
A potentially important elaboration on the life cycle model incorporates the effects
of life expectancy on the age profile of saving in addition to the composition of the
population. People are living longer and, hence, the duration of their retirement is longer.
Although a possible response would be to retire at a later age, this has not occurred for
reasons that are not entirely understood. Several recent studies have found support for a
strong positive life expectancy effect on aggregate saving rates (Bloom, Canning, and
Graham 2003; Kinugasa 2004; Kinugasa and Mason 2007). Fertility decline may also
have a significant effect on saving. A number of studies have concluded that populations
with high child dependency rates have lower saving rates (Mason 1987, Higgins 1994,
Kelley and Schmidt 1996).
An important issue is the role of transfers. In principal, old age consumption can
be financed entirely through intergenerational transfers as in Samuelson’s consumptionloan economy (Samuelson 1958). More realistically, intergenerational transfers vary in
their importance among economies. Some economies rely heavily on pay-as-you-go
public pension programs. Other economies rely heavily on familial support systems,
although much less is known about this form of intergenerational transfer and its
implication for saving.
In Asia, the familial support system is particularly salient. A high percentage of
elderly and adult children live together in most Asian countries. In Japan and the
Republic of Korea, the extent of co-residence has declined substantially in recent
decades. Moreover, young adults have much lower expectations about receiving old age
support in the future than was previously the case (Ogawa and Retherford 1993).
There are currently no comprehensive measures of familial transfers and, hence,
no empirical studies of their effect on aggregate saving rates. But Lee, Mason, and Miller
(Lee, Mason, and Miller. 2000, 2002, and 2003) use a simulation model to explore their
potential effect on aggregate saving. In their analysis of Taipei,China, they find that
changes in age structure and life expectancy alone can account for only a portion of the
rise in aggregate saving rates that accompanied its demographic transition. However,
demographic change combined with a widespread abandonment of familial support
systems can explain the boom in saving that occurred in Taipei,China.
The results presented here make use of a similar simulation model to assess the
implications of population change for wealth and income. The details of the model are
described in Mason and Lee (2007) and only its key features are sketched out here.
In the model, the economy is open to international capital flows, and interest
rates and domestic wages are unaffected by the supply of capital by residents. The age
profile of labor income is fixed, i.e., relative productivity and labor force participation
rates do not change over time, but the labor income profile shifts upward in response to
technological growth that is exogenously determined. These aspects of the model are
relatively conventional.
A distinctive feature of the model is the manner in which consumption is
determined. A standard approach is to assume that each adult establishes a lifetime
21
consumption plan that maximizes its utility subject to a budget constraint: the present
value of consumption equals current assets plus the present value of future earnings
and, in some models, net transfers.
The model used here implicitly assumes that intergenerational altruism is a
pervasive feature of the society. The cross-sectional consumption profile incorporates
those preferences for the well-being, for example, of children and the elderly. The shape
of the age profile does not change over time but it shifts up or down depending on the
accumulation of assets, technological progress, and changes in age structure.
Consumption is determined only indirectly by the economic success of an individual.
Likewise, total consumption by a cohort at each age is only indirectly influenced by the
lifetime economic success of that cohort. This approach is far more consistent with the
consumption patterns observed in Asia, which in each year are quite constant across all
adult ages regardless of the income histories of each generation.5
Consumption at older ages is realized through a combination of intergenerational
transfers and lifecycle saving. The importance of transfers relative to lifecycle saving is
exogenously determined and treated in this model as a policy variable. The economy is
subject to an aggregate budget constraint on flows that, along with other features of the
model, determines the time path of assets, transfer wealth and implicit debt, and income.
In each period, t aggregate wealth is equal to the present value of current and
future consumption of all individuals who are adults in year t less the present value of
current and future labor income of all individuals who are adults in year t. Wealth (W)
defined in this way is a broad measure of wealth that includes both real assets (A) and
the present value of current and future net transfers to year t adults, called transfer
wealth (T). Transfer wealth consists of two components: child transfer wealth and
pension transfer wealth. Child transfer wealth is the present value of transfers from year
t adults to living dependent children and to children who will be born in the future. Child
transfer wealth is negative and equal to the present value of the future cost of children to
those who are adults in year t.
Pension transfer wealth is the present value of net transfers that year t adults will
receive from year t children and from future generations. These transfers may be familial
transfers or public transfers. Pension transfer wealth is the counterpart of implicit debt—
the transfer wealth of today’s adults is equal in magnitude to the implicit debt of future
generations. Implicit debt as calculated here is not limited to public transfers programs,
e.g., pay-as-you-go pension programs. It includes all intergenerational transfers whether
public or private (familial).
The impact of demographic change on capital accumulation and economic
growth depends on the extent to which the economy in question relies on pension
transfer wealth versus capital accumulation to support consumption in old age. This is
treated as an exogenous policy variable by specifying the relative shares of assets and
pension transfer wealth. Two sets of results are presented below. In one, a very low
percentage of pension wealth is transfer wealth (35%), with assets accounting for the
other 65%. In the alternative simulation, transfer wealth is 65% of pension wealth and
assets are 35%.
5
Models based on the standard lifecycle theory or the Ramsey approach produce broadly similar results.
22
Note that the model is not intended to be a complete and comprehensive model
of the economy. The model’s purpose is quite specific—to showing how demographic
changes are likely to influence wealth and assets, and with what implication for
economic growth. Demographic change will influence wealth in three ways. First,
changes in the support ratio influence consumption at each age. If the support ratio is
high, perhaps due to low fertility, then a higher consumption ratio can be sustained.
Higher consumption at old ages means that more wealth must be held at every age to
finance that consumption. Second, people are living longer. To support consumption
over an extended period of retirement, they must accumulate more wealth during their
working years. Third, given the age profile of wealth, changes in age structure influence
aggregate wealth. Up to a point, wealth increases with age and, hence, a population
concentrated in the late working years and early retirement years has greater wealth.
3.2.4. Simulation results for ASEAN
Figure 3.7 shows simulated net saving rates in ASEAN for 1950 to 2050.
Comparative results will be presented in the next section. Productivity growth is
assumed to be 2% per annum here and in all other results presented. The high
intergenerational transfer simulation gives the saving rate if 65% of the wealth required
to support consumption in old age is provided through public and familial transfer
programs. The low intergenerational transfer simulation gives the saving rate if
intergenerational transfers cover only 35% of the consumption needed during retirement.
Changes in age structure lead to a rise and then to a decline in net saving rates.
One might infer from the pattern that population aging is leading to a decline in saving
rates, but this is not correct. Saving rates are rising in anticipation of population aging.
The change in saving rates is transitory, however. As the population stabilizes at an
older age structure, saving rates decline to levels closer to their pretransition level.
Saving rates are strongly influenced by the size of intergenerational transfers. If
transfers play a modest role in supporting the consumption of older adults, changes in
age structure have a very substantial effect on net saving rates, which rise from about
3% of national income in 1950 to peak at 23% of national income in 2010.
If intergenerational transfers play a dominant role in providing support to the
elderly, then the effect of age structure on saving is moderate. Net national saving rates
rise from 2% in 1950 to peak at around 8% in 1985 before gradually declining.
Figure 3.7: Net saving rate simulations, ASEAN population, 1950–
2050. (Low [high] intergenerational transfer assumes that transfer wealth
is 35% [65%] of pension wealth)
23
0.25
0.20
Net saving rate
Low intergenerational transfers
0.15
0.10
0.05
High intergenerational transfers
0.00
1940
1960
1980
2000
2020
2040
2060
Source: [ please add the source]
Figure 3.8: Assets and labor income, ASEAN population, 1950–2050
(Low [high] intergenerational transfer assumes that transfer wealth is 35%
[65%] of lifecycle pension wealth)
Assets and labor income
8
Low intergenerational transfers
6
4
2
High intergenerational transfers
0
1940
1960
1980
2000
2020
2040
2060
Source: [ please add the source]
The impact of age structure on assets is substantial. In 1950, the ratio of total
assets to total labor income is about 0.3 for both intergenerational transfer systems. By
1990, assets have increased to 1.5 times labor income for the low intergenerational
transfer case and to 1.2 time labor income in the high case. After 1990 the systems
24
diverge, with assets relative to labor income increasing to 7 in 2050 for the low
intergenerational transfer case, but only to 2 for the high case. Total wealth in 2050 in
the low case is also 350% greater than in the high case in 2050.6
Figure 3.9: Consumption index, ASEAN, 1950–2050
(Low [high] intergenerational transfer assumes that transfer wealth is 35%
[65%] of lifecycle pension wealth. Consumption index equals 100 in 1950.
Effect of age structure only; effect of productivity increases not included.)
Consumption index (1950=100)
160
Low intergenerational transfers
140
High intergenerational transfers
120
100
80
60
1940
1960
1980
2000
2020
2040
2060
Source: [ please add the source]
As compared with 1950, changes in age structure lead to about a 30% increase
in consumption per equivalent consumer in 2030 given the high intergenerational
transfer policy. Using the low intergenerational transfer policy, changes in age structure
lead to an increase in consumption per equivalent consumer of about 50% in 2050. Note
that the higher consumption after 2025 for the low policy comes with a cost. The higher
saving rates and lower consumption rates necessary lead to lower consumption between
1995 and 2020 under the low policy than under the high one. Consumption remains
permanently higher under the low intergenerational transfer policy. Over the next 100
years (not shown) consumption is 20% higher on average given the low
intergenerational transfer policy. In a closed economy these differences would be larger.
3.2.5. Comparative results
The results presented in this section focus more narrowly on two periods: 1995–
2005 and 2005–2020. The effects of changes in age structure on saving rates depend
on the importance of intergenerational transfers to the elderly (Table 3.8). Given low
reliance on intergenerational transfers, net national saving rates reach very high peaks
in 1995 in the PRC; Japan; and the Republic of Korea. In these economies, saving rates
6
Because a small open economy assumption is used, labor income growth is the same in either case. The
greater wealth is accumulated as foreign assets in the low intergenerational transfer economy.
25
decline to intermediate levels in 2005 and to much lower levels in 2025. In ASEAN and
India, the saving effects are somewhat more modest and are delayed, reflecting the
slower and later changes in age structure.
If intergenerational transfers play a very important role, the effects of age
structure on saving are muted.
Table 3.8: Net saving/national income
IG transfer share low (0.35%)
IG transfer share high (0.65%)
Economy
1995
2005
2025
1995
2005
2025
ASEAN
13.6
21.5
18.5
7.5
7.3
4.9
PRC
32.4
21.6
6.5
7.6
5.3
2.8
India
7.0
15.0
21.6
7.1
7.6
5.7
Japan
38.6
15.9
3.5
4.5
2.9
1.4
Korea, Rep. of
52.9
32.4
2.6
7.9
4.7
1.4
ASEAN = Association of southeast Asian Nations, IG = intergenerational, PRC = People’s Republic of China.
Source: [ please add the source]
Accumulated assets are reported in Table 3.9. Age structure has a substantial
influence on the lifecycle demand for assets if intergenerational transfers are moderate.
The ratio of assets to labor income in 1995 ranged from 1.1 given the demography of
India to 10.2 given the demography of Japan. The demand for lifecycle assets grows in
all cases between 1995 and 2005 and between 2005 and 2025. By 2025, the Republic
of Korea is approaching the simulated level of assets for Japan. Percentage growth
rates are very strong in ASEAN and India. Between 1995 and 2025, assets relative to
labor income increase three-fold in both cases.
Table 3.9: Assets and labor income
IG transfer share low (0.35%)
Economy
IG transfer share high (0.65%)
1995
2005
2025
1995
2005
2025
ASEAN
1.6
2.4
5.0
1.3
1.5
1.8
PRC
2.6
4.4
7.1
1.5
1.7
2.0
India
1.1
1.5
3.9
1.0
1.2
1.7
Japan
10.2
13.6
14.9
2.5
2.6
2.8
5.2
8.9
12.7
2.1
2.2
2.3
Korea, Rep. of
ASEAN = Association of southeast Asian Nations, IG = intergenerational, PRC = People’s Republic of China.
Source: [ please add the source]
The complexities of the relationship between age structure and consumption
growth are apparent in Table 3.10. Consumption growth changes because of changes in
income per effective consumer and changes in the ratio of consumption to national
income that underlie the second dividend. If the consumption ratio changes very little,
the trend in consumption is dominated by changes in the support ratio, i.e., the first
26
dividend. Thus, consumption per equivalent consumer will grow more rapidly during the
dividend period and then decline as population aging dominates the support ratio.
However, if there is a strong response in the consumption ratio, the outcome is
more complex. Rapid accumulation of capital is realized through a decline in the
consumption ratio and slow growth in consumption per effective consumer. As the
consumption ratio rises from low levels, however, consumption growth can be very rapid.
Consumption growth in ASEAN shows this pattern. Given a strong saving
response (low intergenerational transfers), consumption growth is slow in 1995–2005,
but very substantial in 2005–2025. In contrast, given a modest saving response (high
intergenerational transfers), consumption growth is more rapid in 1995–2005 and
dissipates in 2005–2025.
The situation in India is somewhat different. In 1995–2005, consumption is
actually declining modestly (relative to productivity gains) as a result of a decline in the
share of national income consumed. Consumption rebounds after 2005. For the two
decades taken as a whole, consumption growth rates are the same given either policy,
but more detailed results show that consumption growth is substantially more rapid given
the high saving scenario after 2015.
Table 3.10: Annual growth in consumption due to age structure
IG transfer share low (0.35%)
Economy
1995–2005
2005–2025
IG transfer share high (0.65%)
1995–2005
2005–2025
ASEAN
0.3
1.2
0.9
0.6
PRC
3.0
1.4
1.0
0.1
India
–0.2
0.7
0.6
0.7
Japan
4.1
0.5
0.0
-0.3
Korea, Rep. of
5.9
2.6
1.0
0.0
ASEAN = Association of southeast Asian Nations, IG = intergenerational, People’s Republic of China.
Source: [ please add the source]
The PRC, Japan, and the Republic of Korea are in similar situations given a low
level of intergenerational transfers. For 1995–2005, consumption growth is very rapid—
ranging from 3% to nearly 6% above the assumed rate of productivity growth of 2% per
year. During this period, saving rates are declining from the high levels of 1995 and
earlier and income growth is strong, leading to rapid growth in consumption. After 2005,
consumption growth rates are well above those possible in the absence of a strong
saving response.
3.3.
Analysis of international migration
Economists disagree about the economic importance of immigration. The
analysis presented in this section suggests that, for East Asian economies, realistic
immigration policy is not likely to have a substantial influence on population age
27
structure and its economic consequences. There are noneconomic and economic effects
of immigration unrelated to the major demographic changes countries are experiencing.
Many economists judge the potential gains from increased international migration
to be very important. Take one recent statement, for example.
“Here is the question for policy makers at the World Trade Organization
(WTO), World Bank, the Organisation for Economic Co-operation and
Development (OECD), trade and finance ministries around the world: which
remaining impediments to international economic exchange would probably
produce upon their removal the greatest bang in terms of improved efficiency in
the global allocation of resources? (a) agricultural protection? (b) differential tax
treatment of investment? (c) weak protection of intellectual capital? (d)
inadequate prudential regulation in financial markets? Or (e) immigrations
restrictions? Without any doubt, the answer is (e)” (Rodrik, 2002: 314).
A fundamental point is that restrictions on immigration lead to an inefficient
allocation of human resources that reduces standards of living for potential immigrants
and their families and for consumers in receiving countries. The net gains from
immigration are supported by many simulation models (e.g., Hamilton and Whaley 1984,
Smith and Edmonston 1997, World Bank 2006).
One of the most important and difficult issues being addressed is whether the
elimination of barriers to trade and to international capital flows can realize the same
gains that would be achieved by allowing the free flow of labor. Viewed through the lens
of a simple economic model, factor equalization can be achieved by either labor flows or
capital flows. This is played out in dramatic fashion as an increasingly broad range of
services to industrial countries are being provided by workers in the PRC, India, and
other emerging economies.
Several recent studies investigate the extent to which increased international
capital mobility can substitute for immigration. Raut (2007) uses a simulation model to
compare relocating production overseas to allowing increased immigration of labor in
Japan and concludes that immigration is a superior approach as long as the productivity
levels of migrant workers are close to those of Japanese workers. In contrast, Goto
(2007) concludes that immigration is inferior to either foreign direct investment (FDI) or
trade liberalization in terms of welfare improvement. Goto argues that utilizing more
female workers is a better option than allowing more migration as a mean of mitigating
the problems due to population aging. Because their models are based on quite different
assumptions about the social costs of immigration, import barriers, and the labor
productivity of immigrants, it is hard to compare the results. Political realities underlie this
debate with very different “sentiments“ about immigration versus foreign investment.
Even if all barriers to trade and capital mobility were eliminated, labor shortages
still emerge in particular sectors. Many industries in advanced industrial countries face
critical vacancies, especially for the so-called “3D” (dirty, dangerous, and difficult) lowpaid jobs, and these industries can benefit from tapping into cheap labor from
developing countries. A particularly important feature of aging is the increased demand
for health care workers and caregivers.
28
Immigration can generate substantial benefits for sending countries. One channel
is remittances—an important source of external funding for several Asian economies.
According to the 2004 IMF Balance of Payment Yearbook,7 the PRC and India were the
top two remittance-receiving countries (about $21 billion, respectively [what is meant by
“respectively”? Is the total $21B each, or for both?). Other Asian countries, such as the
Philippines ($11.6 billion), Pakistan ($3.9 billion), Bangladesh ($3.4 billion), and Viet
Nam ($3.2 billion), are also among the top 20. Calculated as a share of GDP,
remittances account for more than 10% of GDP for the Philippines, and about 5–6% of
GDP for Bangladesh and Viet Nam. If remittances sent through informal channels were
included, this share would increase substantially.8 Remittances in the region are growing
very rapidly, largely due to increases in international migration flows, although some of
the increase might reflect a shift from informal to formal channels in response to the
convenient remittance services and tightened regulatory scrutiny. India, for example,
reported a spectacular increase in remittance inflow, from $13 billion in 2001 to $20
billion in 2003. Remittances to East Asia and the Pacific also doubled between 2001
($20 billion) and 2004 ($41 billion), mainly due to the surge in remittances to the PRC.
Officially recorded remittances to developing countries in the world rose from $97 billion
to $167 billion between 2001 and 2005, up 73%. More than half of that increase
occurred in the PRC, India, and Mexico (World Bank 2006).
A growing literature addresses the role of remittances in poverty reduction
(Adams and Page 2005, IMF 2005, Hugo 2005, Yang and Martinez 2005). Some
researchers have argued that remittances are an important poverty reduction tool
because overseas contract workers are mostly unskilled workers with little education.
Remittances from these workers directly and immediately flow to poor families in
sending countries and thus they have an economic impact at the grass roots level.
Remittances may not attenuate income inequality in developing countries. Empirical
evidence on this point is mixed, from widening disparities (Stark, Taylor, and Yitzhaki
1986) to equalizing income inequality (McKenzie and Rapoport 2004) even for the same
country, Mexico.
Remittances are the second largest source of foreign exchange, behind FDI.
Many researchers argue that remittances have an advantage over FDI, however,
because remittances are usually less volatile than FDI (Ratha 2003). Studies have
shown that remittance inflows are countercyclical. Disasters and economic downturns
increase the inflow of remittances, suggesting that remittances serve as a mechanism
for consumption smoothing (e.g. Lucas and Stark 1985, Yang and Choi 2005, Clarke
and Wallsten 2004 [not in references]).
The purpose of the analysis presented here is to judge an important but specific
issue—the feasibility and desirability of using immigration policy to influence population
age structure and its economic effects. Two issues are considered in turn. The first issue
is the potential for immigration policy to influence age structure for both sending and
receiving countries. This analysis distinguishes permanent immigration from guest
worker programs. The second pertains to the economic effects of immigration, which are
presented by using the simulation model described in the preceding section. This
7
8
These numbers are calculated by the World Bank staff members as the sum of workers’ remittances,
compensation of employees, and migrant transfers. There are several issues on the definition, quality, and
coverage of data on remittances. See World Bank (2006) for details.
Household surveys provide information on the percent of remittances via informal remittance channels,
ranging from 5% for Guatemala to 54% for Bangladesh (World Bank 2006).
29
analysis does not consider the guest worker program because guest workers leave the
receiving country and, hence, do not affect the lifecycle demand for wealth in it.
The analysis considers three scenarios that encompass different approaches to
increasing immigration into Japan and the Republic of Korea (Table 3.11). Two of the
scenarios assume that immigration is permanent. The “guest worker” scenario assumes
that immigrants remain only for 5 years and are then repatriated. Permanent family
migration allows for immigration by family members. Immigrants tend to be concentrated
in the working ages, but a portion of the immigrant stream consists of children and older
adults. The distribution of immigrants is based on the UN Population Division (2001)
study that uses the age and sex pattern of immigrants to Australia, Canada, and the US.
Males were 47.4% and females 52.6% of the total. Of the total, 41% were aged 20–34.
About one third were under 20, and fewer than 5% were 60 or older.
Table 3.11: Three immigration scenarios
Age distribution of immigrants
Status in receiving country
Permanent family
migration
Average of immigrants to Australia, Canada, and
US (UN Population Division2001).
Permanent residents
Permanent worker
migration
Same as above, but restricted to 20–34 years of
age.
Permanent residents
Guest workers
Same as above but restricted to 20–34 years of
age.
Remain 5 years.
Rate of immigration is 4.5 immigrants per 1,000 members of the indigenous population. Immigrant flow is reduced to zero if the
number of immigrants and their descendants, assuming no inter-marriage between the indigenous and the immigrant
populations, reaches 30% of the total population. Descendants of guest workers live in their home country.
Source: UN Population Division 2001.
The “permanent family migration” scenario uses the age and sex distribution from
the UN study. The “permanent worker migration” and the “guest worker” scenarios
restrict immigrants to young working ages (20–34) using the sex and age distribution for
those age groups from the UN study.
Immigrants are subject to the same mortality rates as the country in which they
reside. The total fertility rate of immigrants continues at the level of the sending country
until 2045, thereafter converging to the level in the receiving country over a period of 30
years. The annual immigration rate is 4.5 immigrants per 1,000 members of the
nonimmigrant population. This is the net rate of immigration to the US for 2000–2005, a
high rate by international standards. Immigration is increased beginning in 2010 and
continues until the immigrant population, including descendants, reaches 30% of the
indigenous population (the surviving 2010 population and descendants).
Immigration influences the sending countries as well as the receiving countries.
The analysis presented here assumes that immigrants are drawn entirely from ASEAN
countries. The first questions considered are demographic ones. Can immigration policy
be used to influence age structure to a significant degree? Or, more to the point: Can
aging countries substantially increase the working age share of their population through
immigration?
In answering this question, the distinction between permanent immigration and
guest worker programs is critical. With a guest worker program targeted at immigrants of
30
the preferred age, a receiving economy that is small relative to sending economies can
achieve virtually any age distribution it so chooses. Singapore, for example, could
increase the share of its population in the 30–39-year-old age group by allowing 30-yearolds to immigrate from the PRC and then sending them home when they reach age 40.
Of course, the size of the guest worker program relative to the domestic population will
increase to the extent that a country tries to exert more influence over the age structure
of its population.
With permanent immigration programs, however, the situation is more complex.
Permanent immigrants marry, have children, and grow old as residents of the receiving
country. Over time their vital rates—birth and death rates—converge with the rates that
characterize the indigenous population. As a consequence, over the very long term, the
immigrant population will develop the same age distribution as the indigenous population.
In the shorter term, however, large-scale immigration programs can influence the age
structure of the receiving country.
The share of the population of working age (20–64) is plotted for Japan in Figure
3.10 and for the Republic of Korea in Figure 3.11, in the absence of any change in
immigration rates and given a radical departure to a policy much more open to
immigration.
In the absence of immigration, Japan’s working age population is projected to
decline to a little over 45% of the total population by 2050 from the current level of 62%.
Allowing permanent immigration on a very large scale will slow the rate of decline. With
a family migration program, the working age population will be higher by almost 5
percentage points in 2050. With a permanent worker migration program, the working age
population will be higher by about 7 percentage points. Note, however, that worker
immigrant policy has a much larger impact than a family immigrant policy in earlier years.
The guest worker program has a larger, sustained effect on the working age population.
Once the policy comes on line, the deterioration in the share of the working age
population essentially stops.
31
Figure 3.10: Working age population, Japan, 2000–2050
70
Percentage 20–64
65
60
55
50
45
40
2000
2010
2020
No migration
Permanent worker migration
2030
2040
2050
Guest worker
Family migration
Source: [ please add the source]
In the Republic of Korea, the share of the working age population is still
increasing until 2020 irrespective of the immigration policy, but in the absence of a more
liberal immigration policy, the working age share declines from over 65% in 2020 to
about 50% in 2050. Immigration slows the decline. The impact of the guest worker
program is largest, followed by the permanent worker migration policy and the family
migration policy.
32
Figure 3.11: Working age population, the Republic of Korea, 2000–2050
70
Percentage 20–64
65
60
55
50
45
40
2000
2005
No migrant
2010
2015
Guest worker
2020
2025
2030
2035
Permanent worker migrant
2040
2045
2050
Family migrant
Source: [ please add the source]
What are the implications for the age structure of the ASEAN sending
economies? The answer will depend on the population size of the receiving economies
(or the immigrant stream) relative to that of the sending economies and on the extent to
which the age distribution of the immigrant stream, eventually including their
descendants, is different than the age distribution of the sending economy. In 2010,
when the immigration policies take force, the ASEAN population is projected to be 589
million as compared with a combined population of Japan and the Republic of Korea of
177 million. Hence, a net in-migration rate of 4.5 per 1,000 for Japan and the Republic of
Korea translates into a net out-migration rate of 1.4 per 1,000 for ASEAN. Moreover, the
ASEAN population is increasing relative to the populations of Japan and the Republic of
Korea. By 2050, an out-migration rate for ASEAN of 0.9 per 1,000 would produce an inmigration rate for Japan and the Republic of Korea of 4.5 per 1,000.
The extent to which the age distribution of the ASEAN migrant stream (and their
descendants) differs from that of the ASEAN population depends very much on the
particulars of the migration policy implemented. The permanent immigration policies
have a very small effect on the share of the working age population. In 2050, the year for
which the effect is largest, the permanent family migration policies of Japan and the
Republic of Korea would reduce the working age population of ASEAN by 0.3
percentage points. The permanent worker migration policy has a larger impact, but the
maximum loss in the working age population is 1 percentage point realized in 2040. The
guest worker program has the largest effect, as expected, but the working age
population is only lower by 2 percentage points by 2050, with smaller effects before then
(Figure 3.12).
33
Figure 3.12: Working age population, ASEAN, 2000–2050
70
Percentage 20–64
65
60
55
50
45
40
2000
2010
No migration
2020
Permanent worker migration
2030
2040
Guest worker
2050
Family migration
Source: [ please add the source]
As with any simulation analysis, the results are based on a particular set of
assumptions. Are there general lessons? First, the immigration policies analyzed are
very substantial departures from current policy. That Japan or the Republic of Korea will
adopt an immigration policy as liberal as the US policy or keep such a policy in place
until the immigrant population reaches 30% of the total is a remote possibility. Any
realistic immigration policy will have considerably smaller demographic effects than the
ones shown in the simulations. If Japan and the Republic of Korea choose to
accommodate a substantial increase in immigration, the share of the working age
population will decline somewhat more slowly. The effect is likely to be greater if Japan
and the Republic of Korea continue to favor guest worker programs.
Second, the impact of immigration policy on sending countries may be diluted
compared with the analysis presented here. In Asia, in particular, the countries that are
likely to import significant numbers of immigrants within the next few decades have small
populations relative to the sending countries (most of ASEAN, the PRC, and India). By
importing workers, Japan and the Republic of Korea will not have a substantial impact
on the relative size of the labor forces of the rest of Asia. Of course it is possible that
highly targeted policies—on particular economies or particular skill sets—could have a
measurable effect.
3.3.1. Demographic dividends and immigration
The effect of immigration on demographic dividends varies with the immigration
policy. In the permanent immigration scenarios, the immigrant population severs all ties
with the sending economy and fully integrates into the population and economy of the
receiving one. Permanent immigrants earn wages, consume, and give and receive
34
transfers in exactly the same way as the native population.9 The most immediate and
direct effect of permanent immigration on both the receiving and the sending economies
is that immigration influences the first dividend, i.e., growth in the effective number of
producers relative to the effective number of consumers. The support ratio grows more
rapidly to the extent that immigrants are concentrated in the working ages. However,
they are also concentrated in the reproductive ages. Their rates of childbearing are also
moderately higher than that in the native population. Because child dependency is
higher in the immigrant than the native population, the difference between the economic
support ratio for the native and the immigrant population is smaller than would otherwise
be the case.
When the immigration policy is first implemented—and for several decades
thereafter—the permanent worker migration policy has the largest effect on the first
dividend. In Japan, the policy is sufficient to avoid a negative first dividend between 2015
and 2025 (Figure 3.13). In 2010–2015, the migration policy increases growth in output
per effective consumer by 0.3 percentage points per year and this increases to 0.5
percentage point per year for 2030–2035. The cumulative gain in labor income per
effective consumer reaches 14% in 2045. The policy only postpones population aging.
Beginning in 2045, the permanent worker migration support ratio declines more rapidly
than the no migration support ratio and eventually converges with the no migration
support ratio. Why does this occur? First, the immigrant population has become
sufficiently large that it reaches the assumed 30% limit and essentially no further
migration occurs after 2050. Second, the immigrant population is aging. By 2050, the
first waves of immigrants are in their 60s and 70s.
The permanent family migration policy has a more modest effect on the support
ratio. The total gain in labor income per effective consumer by 2050 is only 8%.
9
For simplicity sake, the study assume that immigrants arrive without wealth. Given the heavy
concentration of immigrants at young ages and the relatively low wage levels in the sending countries, this
assumption has little impact on the outcome.
35
Figure 3.13: The first dividend and immigration, Japan, 2000–2050
1990
0.00
2000
2010
2020
2030
2040
2050
2060
Annual growth of support ratio (%)
-0.10
-0.20
-0.30
-0.40
-0.50
-0.60
-0.70
-0.80
-0.90
No migration
Family migration
Permanent worker migration
Source: [ please add the source]
The effect of immigration on the first dividend is even smaller in the Republic of
Korea than in Japan (Figure 3.14). For some periods, the immigration policy produces
additional economic growth of about 0.2% per year. The cumulative gain in the dividend
by 2050 is only 10% from permanent worker immigration and 5% from permanent family
migration.
36
Figure 3.14: The first dividend and immigration, the Republic of Korea,
2000–2050
Annual Growth of Support Ratio (%)
0.8
0.6
0.4
0.2
0.0
1990
-0.2
2000
2010
2020
2030
2040
2050
2060
-0.4
-0.6
-0.8
-1.0
No migration
Family migration
Permanent worker migration
Source: [ please add the source]
The effect on ASEAN’s first dividend is close to negligible. The cumulative impact
by 2050 is to reduce the economic support ratio by 1.1% in the case of the permanent
worker migration policy and by 0.5% in the case of the family migration policy.
The first dividend arises solely because of the compositional effects associated
with immigration—that a larger share of the population is concentrated in the working
ages. The immigration policy has additional implications because of the effects on
intergenerational transfers and capital accumulation. Immigrants pay taxes that support
children and the elderly, they have children who are supported by native taxpayers, and
they grow old and rely on future generations of taxpayers. Some of these tax payers will
be the children of immigrants and some will be the descendants of members of the
native population. These effects are components of what the authors have termed the
second demographic dividend.
Analysis is based on the simulation model described in section 3.2 and in more
detail in Mason and Lee (2007). The model assumes that fiscal policy is unaffected by
immigration in the following sense. First, the relative magnitudes of transfers to children
by taxpayers and parents (1/3 versus 2/3) are held constant. Second, pension transfer
wealth, the net present value of current and future transfers to living adults, is held
constant relative to the values of assets held by living adults (1:1). In other words, half of
the resources needed in old age are financed through saving and half through transfer
programs.
The simulation captures a number of important effects associated with the
immigration policies being considered. First, both immigration policies increase the
number of children and hence public spending on them. This occurs because immigrants
37
are heavily concentrated in the reproductive ages and because they have higher fertility
than members of the native population. The effect is greatest for the family migration
policy, but substantial for the worker migration policy. Second, both immigration policies
lead to an increase in the value of unfunded pension benefits that must be paid by future
generations. This is not necessarily a burden for the native population because the
implicit debt in the pension system will be paid by descendants of immigrants as well as
descendants of the native population. Third, both immigration policies lead to an
increase in saving rates and assets because half of the retirement needs of the elderly
are met through asset accumulation. Although the immediate effect of this is to increase
per capita saving and reduce per capita consumption, the eventual effect is to raise per
capita assets, asset income, and consumption.
The combined effect of immigration policies is evaluated using consumption per
equivalent consumer. Figure 3.15 reports the percentage change in consumption per
equivalent consumer relative to the no change in immigration policy for Japan and the
Republic of Korea. In all cases, the impact of a relaxed immigration policy is to depress
standards of living by a small amount because taxes for programs for children must rise
and because saving rates must increase. Over time, however, the favorable effects of a
relaxed immigration policy emerge. This reflects the first dividend—that there are more
workers relative to the number of children—and the effects on capital accumulation. The
favorable effects emerge first and are strongest for the immigration policy that
emphasizes young workers rather than family migration. By 2050, consumption is higher
by 11% in Japan and by 8% in the Republic of Korea.
These effects are not inconsequential, but they are not a “free lunch.” They are
realized in part by foregoing consumption in earlier periods. In the case of family
migration to the Republic of Korea, higher consumption is not realized until 20 years
after the implementation of the immigration policy. Also note that this benefit is
associated with an enormous increase in the number of immigrants. By 2050, 30% of the
populations of Japan and the Republic of Korea consist of immigrants and their
descendants.
38
Figure 3.15: Effect of immigration policy on consumption per effective
consumer
12.0
Percentage change
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
1990
2000
Japan FamM
2010
2020
Japan PWM
2030
2040
Korea FamM
2050
2060
Korea PWM
FamM = family migration, Korea = Republic of Korea, PWM = permanent worker migration.
Source: [ please add the source]
The economic effects of immigration on the sending country are quite modest.
The impact of immigration policy on per capita consumption varies between –1% and
+2% between 2000 and 2050. This is not surprising, given the very small effects of the
immigration policies on the age structure of ASEAN countries.
3.4.
Policy implications and conclusions
The connections between population change and the macroeconomy lead to two
broad sets of policy implications. One is related to influencing population change and
age structure, per se. A second set pertains to how economic policy can best
accommodate population policy.
3.4.1. Population policy options
Countries in Asia and elsewhere are debating and reforming policies that
influence fertility and immigration.
Family and fertility policy. Economies in the region exhibit considerable diversity in
their demographic characteristics and, hence, in the demographic challenges that they
confront in the immediate future. ASEAN and India will enjoy the first demographic
dividend until 2025, but, for other countries, rapid population aging and, in some cases,
depopulation is a more immediate concern.
Increased life expectancy is partly responsible for population aging, but low rates
of fertility play a critical role. The total fertility rates of Hong Kong China; Japan; the
39
Republic of Korea; Singapore; and Taipei,China are at 1.3 births per woman or less.
Perhaps the PRC’s fertility and that of other countries will drop to such low levels, as well,
in the coming years. If such low levels of fertility persist, substantial depopulation will
occur and population aging will be even greater than anticipated in the population
projections presented above. Thus, it is not surprising that low fertility Asian countries
are becoming more interested in pronatalist population policies. Japan heavily
subsidizes child care services and is trying to change the institutional environment to
facilitate marriage, childbearing, and childrearing. Recently, the Japanese Government
implemented measures that require employers to provide very costly childcare leave
benefits. The governments of the Republic of Korea and Singapore offer financial and
housing incentives to couples with more than two children. These are just a few
examples of the many ways that Asian countries are trying to encourage young adults to
marry and bear more children.
The experiences with such policies are not entirely satisfactory, however. The
total fertility rate in Japan bounced back slightly, but remains at a very low level. While
fertility may have declined even more without these measures, the incentives appear to
be insufficient to change young couples’ reproductive behavior, with the sizable amount
of funding. Furthermore, there are dangers that employers will respond to these policies
by hiring fewer women of childbearing age, and firms could become less efficient and
less competitive in the global economy.
Fertility rates may recover in response to social or economic developments that
are difficult to anticipate. If not, Asian governments will surely explore a broader (and
more expensive) range of pronatalist policies.
Immigration policy. A second policy option is immigration. Immigration may attenuate
the pace of aging in countries further along in their demographic transitions and speed
the aging process in countries earlier in the transition. The region’s countries with young
populations (Bangladesh, India, and Pakistan) are sufficiently large to supply a steady
stream of migrant workers to countries with older populations (Japan; the Republic of
Korea; and, to a more limited extent, the PRC).
Most Asian countries, however, have very restrictive immigration policies. Even
in the face of severe labor shortages, Japan and the Republic of Korea have admitted
only a limited number of foreign workers, many on a temporary basis. Instead, Japanese
and Korean firms have shifted industrial production to countries with ample labor forces
and have relied on automation and skill intensive technologies to reduce their
dependence on unskilled labor. Policies and attitudes toward immigration may change
as populations age and as labor force growth slows and, in some instances, turns
negative. More likely, foreign investment and trade will respond more readily than
immigration to demographic change in the region.
In some Asian economies, immigration will continue to be an important economic
and demographic phenomenon. For them and the economies to which they are sending
immigrants, immigration policy will continue to be important and potentially contentious.
For sending economies, an important issue is remittances. Weakness in the
financial sector in many developing economies imposes substantial transaction costs on
40
remittance flows. Removing this barrier will substantially increase remittances through
formal channels. This is also an area in which host economies and governments need to
cooperate to provide better financial services to immigrants. Increasing remittances
through formal financial sectors may actually benefit host economies because it
generates more fees for financial services and more tax revenues for governments.
Needless to say, facilitating international labor mobility is the most crucial means of
increasing remittance flows to developing countries.
Perhaps the most difficult question for policy makers is equal treatment of
migrants. The fundamental dilemma is that “differences prompt migration, but most
international and many national standards call for equal treatment of migrants” (Martin,
2005). Although increasingly large numbers of conventions and standards are approved
to protect migrants and their families, notably by the International Labour Organization,
most of these are ratified only by sending countries, and are widely violated in practice.
However, providing minimum social protection for nonpermanent workers may enhance
the productivity of workers, especially for the longer term. It will also contribute to
diminishing the severe inequality that characterizes the region.
3.4.2. Social and economic policy options
In the absence of demographic solutions to the problems accompanying
population aging, Asian countries must depend on economic and social policies that
meet the needs of the elderly and promote strong economic performance. Traditionally,
elderly people in Asia have been supported and cared for by their families, but there are
clear indications that family support systems are eroding. The challenge for public policy
in Asia is to develop systems of support for the elderly that are consistent with poverty
reduction goals, that do not undermine work and saving incentives, and that are
financially sustainable.
Policy options for self-support. What aging societies lose in sheer numbers of
workers they can gain back through more productive economies. A top priority is to tap
the productive potential of older workers by promoting their continued employment. This
is especially true in the region where public support systems are not well developed.
Throughout Asia and much of the world, however, older workers are withdrawing from
the labor force at younger and younger ages. For some, deteriorating health may dictate
early retirement but, in general, older adults are healthier and have lower rates of
disability than in the past. Rising incomes are only partly responsible for the decline in
work among older adults because retirement is still a luxury available only to the
relatively well off in Asia.
The mechanisms that underlie early retirement are unclear, but individuals’
decisions to work appear to be increasingly governed by complex forces that reflect the
influence of firms, labor unions, and public officials. The resulting rigidities in the labor
market often discourage or, in some instances, virtually prohibit continued employment
by older workers. Perhaps the most serious restriction is that governments impose
mandatory retirement ages. For most Asian countries the statutory retirement age is 65
or below. Many countries have been slow to adjust mandatory retirement ages upward
41
despite rapid improvements in health and life expectancy that enable people to continue
to be productive longer than in the past. Many people today want to work longer than
laws permit. In practice, retirement often comes earlier than the statutory retirement age.
Firms often force older workers into early retirement and many Asian governments do
not prohibit this practice. This is particularly true when there are general downturns in
the economy, when particular sectors or firms decline, or when firms restructure their
production processes.
Despite evidence to the contrary, dismissing older workers is thought to help job
prospects for young employed men, who are often viewed as the primary breadwinners
for their families. Older women may be especially vulnerable to such policies as they are
frequently viewed as secondary rather than primary breadwinners in the family. During
the Republic of Korea’s economic crisis, for example, female employment declined more
rapidly than male employment, unemployed female workers were more likely to withdraw
from the labor force, and when women were reemployed they were less likely to obtain
full-time regular positions than their male counterparts.
There is little reason, however, for governments to encourage early retirement.
The early retirement practice reduces employment and income and can dampen
economic welfare in general. Cutting the number of older workers does not appear to
increase employment among young workers, either. Older and younger workers
frequently have different skills, and labor markets rarely shrink and grow in the same
sectors or occupations. Most of all, as long as wages are flexible and adjust to
productivity differences, there is no reason to replace older workers with young workers.
Unfortunately, this is not the case in many countries. Wages are usually
downwardly rigid and, thus, do not adjust when a worker’s productivity is in decline. To
make matters worse, wage systems in some Asian countries—Japan and the Republic
of Korea in particular—are partly based on seniority and firms find themselves paying
older workers far more than the value of their marginal product. While the rigidity of
wage system varies across economies and appears to be easing in Japan and the
Republic of Korea, efforts to tie wages more closely to performance and to increase
flexibility in job assignments and hours will be increasingly important for many Asian
governments as population aging accelerates.
Policy options for public support systems. Public pension programs offer two
important advantages over self-support or family support. First, they represent a
politically acceptable means of providing an economic safety net for older people who
might otherwise experience severe levels of poverty. Second, national programs allow
risk pooling. Individuals who must provide for their own retirement needs may make poor
investments. They may suffer a disability that curtails their income-earning capacity or
experience unusual longevity and outlive their savings. Familial support systems provide
very limited diversification of this risk. Public programs, however, can spread the risks
over the entire population and provide a monthly benefit that lasts as long as the
beneficiary survives. Most public pension programs include some form of disability
insurance not limited to the elderly.
However, studies in developed countries have shown that the incentive structure
of public pension programs causes a decline in retirement ages (Gruber and Wise 1999).
42
In the US, large increases in social security benefits have been partly responsible for the
decline in the percentage of older people who remain in the labor force. Programs in
Europe that impose very high effective tax rates on older workers have led to very low
rates of labor force participation among older Europeans.
In most of Asia, public pension programs have been modest and, consequently,
have not greatly influenced older workers. While many Asian economies offer some type
of support for the elderly, only a few, such as Japan and Singapore, have pension
schemes that cover more than a fraction of the elderly population. Some of the PRC’s
provinces and cities are experimenting with approaches to financing retirement benefits.
Elsewhere in the region, however, pension schemes exist in theory but cover very few
workers. The expansion of public benefit programs currently being considered in many
Asian countries is likely to lead to further declines in the average age at retirement.
Public programs entail other drawbacks, too. Public pension programs that are
not carefully designed will prove to be unsustainable as the number of elderly people
increases relative to the working age (and taxpaying) population. Many countries have
pay-as-you-go systems in which current retirees are supported not by their own savings
but by contributions from current workers. Current workers will, in turn, be supported in
old age by the next generation of workers. As the number of retirees increases relative
to the number of workers, either payroll taxes must rise to high levels, or benefits must
be reduced to low levels, or some combination of the two. For example, Japan’s public
pension program will face enormous difficulties in the coming years.
Providing wide coverage may also encounter serious administrative hurdles,
particularly in low-income countries with large numbers of agricultural, self-employed,
casual, domestic, and informal-sector workers. It is notoriously difficult to collect pension
payments in sectors where labor turnover is high and documentation is weak. Recent
legislation in the Philippines, for example, requires that household help and selfemployed workers be covered, but there is a substantial gap between coverage under
the law and coverage in practice.
Finally, public pension programs are only feasible in countries with a substantial
degree of political stability. The ability of a government to collect taxes may decline, or
the political regime may change, with new leaders backing out of promises made by their
predecessors. As governments obtain privileged access to large pension reserves, they
may also make unwise investments or pursue large-scale public infrastructure projects
without adequate scrutiny of potential risk and return (World Bank 1994).
In addition to funding and implementing pension schemes, policy makers in Asia
will face particularly hard choices in allocating health care resources. Demand for health
care increases as economies develop and per capita income rises, reflecting the
increased resources available to meet the demand. The costs of treating chronic
diseases that affect the elderly are skyrocketing, whereas childhood diseases and
infectious diseases are still widespread in some countries.
The public pension system and health care plans that are formulated and
implemented during the next few years will influence the well-being of people in Asia for
decades to come. While the degree of challenge will vary depending on the speed of
population aging and the level of development, population aging presents challenges in
the finance of pension and health care. Asian governments will be increasingly faced
43
with decisions about what type of pension and health care to provide, for whom, and
how to do so efficiently.
Asia’s demographic situation is unique in the world, characterized by remarkable
diversity and rapid change. Many countries are only midway through their demographic
transitions while others are quite far along. The relationship between demographic
change and the economies of Asia are complex. Policies suited to countries with large
numbers of school age children and rapidly growing labor forces are no longer
appropriate for populations with large numbers of older workers and retirees. The
challenges are many, but with sound domestic policy and effective regional cooperation,
Asia’s demographic change will be conducive to greater prosperity throughout the region.
44
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